How to File for Chapter 7 Bankruptcy

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About the Author

After receiving his J.D. from the University of Michigan Law School in 1985, Albin Renauer worked for various public-interest law firms in the bay area and as a staff attorney for Chief Justice Rose Bird of the California Supreme Court.

He spent 17 years as an editor at Nolo, where he helped create numerous books and software programs, including the bestselling WillMaker. He also edited Law on the Net, the first online directory of legal resources and was the architect of Nolo's Webby Award winning website during the dot-com boom.

Currently, Albin is an independent web and database developer and Webby Award judge. His latest project is LegalConsumer.com, an online companion to his How to File for Chapter 7 Bankruptcy designed to help debtors file for bankruptcy.

Cara O'Neill is a legal editor and writer at Nolo, focusing on bankruptcy, consumer credit, and debt. She writes for several sites, including Nolo.com, Lawyers.com, AllLaw.com, and TheBankruptcySite.org. She also edits a variety of Nolo book titles and updated Nolo’s How to File Chapter 7 Bankruptcy, 19th edition.

Prior to joining Nolo, Cara practiced for over 20 years in civil litigation and bankruptcy. During that time, she served as an Administrative Law Judge mediating disputes in the automotive industry, taught undergraduate and graduate law courses, and served as house counsel for a large insurance company. She earned her law degree in 1994 from the University of the Pacific, McGeorge School of Law, where she served as a law review editor and graduated a member of the Order of the Barristers—an honor society recognizing excellence in courtroom advocacy. Cara maintains a bankruptcy practice in Roseville, California at the Law Office of Cara O’Neill.

Help Beyond the Book

Sample Chapter

Should You File for Chapter 7 Bankruptcy?

In the chapters that follow, we explain how to complete the required bankruptcy paperwork, what happens to your debts and property when you file for bankruptcy, how to get help with your bankruptcy, and how to pick up the financial pieces once your bankruptcy is final, among other things. But before you get to these important topics, you need to figure out whether you can—and should—file for Chapter 7 bankruptcy in the first place. This chapter will give you an overview of the bankruptcy process and help you decide whether Chapter 7 bankruptcy is right for you.

Bankruptcy in America: The Big Picture

Although you may not care much about the larger bankruptcy picture, understanding it will help you keep your situation in perspective. It may be reassuring to know that you’re not alone, even though you may feel isolated or even like a failure.

Why People File for Bankruptcy

Studies show that the most common reasons for filing for bankruptcy are:

job loss, followed by an inability to find work that pays nearly as well

medical expenses that aren’t reimbursed by insurance or government programs

divorce or legal separation, and

small business failures.

Once a financial catastrophe strikes, many of us wind up having to take on significant debt just to weather the storm. If we saved enough, maybe we’d be ready for these unexpected twists and turns. But, for a variety of reasons, many of us spend too much and save too little. Let’s take a closer look at how we got so financially overextended.

Why You Shouldn’t Feel Guilty About Filing for Bankruptcy

The American economy is based on consumer spending. Roughly two-thirds of the gross national product has come from consumers like us spending our hard-earned dollars on goods and services we deem essential to our lives. As Americans, we learn from an early age that it’s a good thing to buy all sorts of products and services. A highly paid army of persuaders surrounds us with thousands of seductive messages each day that all say, “buy, buy, buy.”

These sophisticated advertising techniques (which can often cross the line into manipulation) work, and as a result, we buy. And for those of us who can’t afford to pay as we go, credit card companies relentlessly offer credit, even to those of us deeply in debt.

Readily available credit often makes it easy to live beyond our means and difficult to resist the siren songs of the advertisers. If, because of illness, loss of work, or just plain bad planning, we can’t pay for the things we need, feelings of fear and guilt are often our first responses. But, as we’ve also seen, the American economy has depended on our spending—the more, the better. In short, much of American economic life is built on a contradiction.

If you are grappling with guilt, remember that large creditors expect defaults and bankruptcies and treat them as a cost of doing business. Banks issue many credit cards because they are very profitable, even though some credit card debts are wiped out in bankruptcies and never repaid.

Bankruptcy is a truly worthy part of our legal system, based as it is on forgiveness rather than retribution. Certainly, it helps keep families together, frees up income and resources for children, reduces suicide rates, and keeps the ranks of the homeless from growing even larger. And, perhaps paradoxically, every successful bankruptcy returns a newly empowered person to the ranks of the “patriotic” consumer. If you suddenly find yourself without a job; socked with huge, unexpected medical bills you can’t pay; or simply snowed under by an impossible debt burden, bankruptcy provides a chance for a fresh start and a renewed, positive outlook on life.

What About the Downside?

Despite its many benefits, bankruptcy also has disadvantages—economically, emotionally, and in terms of your future credit rating. The bankruptcy process can get intrusive. As part of your public filing, you are required to disclose your financial activities during the previous year or two, as well as your income, debts, and current property holdings.

Bankruptcy also carries a certain stigma. (Otherwise, why would we spend so much time talking you out of feeling bad about it?) Some people would rather struggle under a mountain of debt than accept the label of “bankrupt.”

If you have a bankruptcy on your credit report, you will need to convince those who have business dealings with you that you made every effort to meet your financial obligations before resorting to bankruptcy. Whether you are renting or buying a home, purchasing or leasing a car, or seeking financing for a business, your bankruptcy will be counted against you, at least for several years (and it will stay on your credit report for ten years). And, although you may be able to get credit cards after bankruptcy, you will have a high interest rate, at least for a while.

While these facts may seem like downsides, they collectively have an upside. You may have to pay as you go for several years because it will be tough to get credit. Filing for bankruptcy can be a harsh wake-up call, one that will give you a new perspective on the credit system. A bankruptcy temporarily removes you from the credit hamster wheel and gives you some time and space to learn to live credit free (or, at least, to fashion a saner relationship to the credit industry).

Bankruptcy Law: A Work in Progress

In October 2005, Congress passed a law that changed the way bankruptcy works. One of the purposes of this law, known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), was to cut down on Chapter 7 bankruptcies. BAPCPA was drafted by lobbyists for the credit card and banking industries, who assumed that many would-be bankruptcy filers could afford to pay back at least some of their debt, and should therefore be required to do so.

The hallmark of BAPCPA is what’s known as the means test—a questionnaire that helps determine whether filers have sufficient “disposable” income to fund a Chapter 13 bankruptcy plan. In general, those with higher incomes are more likely to fail the test and be forced out of Chapter 7 bankruptcy. As it turns out, however, very few people need to worry about this test. Contrary to what the supporters of the BAPCPA thought, the vast majority of those who use Chapter 7 have little or no income to spare. As a result, almost everyone who wants to file for Chapter 7 bankruptcy can still do so.

There were numerous additional changes in the law that make filing for Chapter 7 bankruptcy somewhat more difficult and, if you use an attorney, more expensive. But, by following our step-by-step instructions, most people will be able to handle their own cases.

This 19th edition of How to File for Chapter 7 Bankruptcy also incorporates the many interpretations of the law handed down by the nation’s bankruptcy courts. New court decisions come out every day, from bankruptcy courts, federal district courts, bankruptcy appellate panels (B.A.P.s), federal Circuit Courts of Appeal, and even the U.S. Supreme Court. What all this means, of course, is that the day after this book hits the shelves, a new case may add some spin on a procedure or rule that you really need to know about. To make sure you have the most up-to-date information and forms, check this book’s companion page on Nolo.com (See “Get Legal Updates and More at Nolo.com,” in the introductory chapter, “Your Chapter 7 Bankruptcy Companion.”)

An Overview of Chapter 7 Bankruptcy

This book explains how to file for Chapter 7 bankruptcy. (It’s called “Chapter 7” because that’s where it appears in the bankruptcy code.) Chapter 7 bankruptcy is sometimes called “liquidation” bankruptcy. It cancels most types of debt. Most people who use Chapter 7 get to keep all their property, but if you have too much, the bankruptcy trustee will liquidate (sell) your nonexempt property for the benefit of your creditors. Some states are more generous than others when it comes to how much you can keep. (You can find a list of each state’s exemptions, as well as the federal exemptions, in Appendix A; Ch. 3 delves into the subject of exemptions in much more detail.)

What This Book Doesn’t Cover

This book explains the procedures for filing a Chapter 7 bankruptcy if you are an individual, a married couple, or a small business owner with personal liability for your business debts. This book doesn’t cover:

Chapter 13 bankruptcy. Chapter 13 allows filers to keep their property and repay some or all of their debt over three to five years. For more information on Chapter 13, see “Pay Over Time With Chapter 13 Bankruptcy,” below. You can get details about Chapter 13 bankruptcy in Chapter 13 Bankruptcy, by Stephen Elias (Nolo).

Bankruptcy for business partnerships. If you’re a partner in a business (with someone other than your spouse), filing for a personal bankruptcy will affect your business; we don’t address that situation in this book.

Bankruptcy for major stockholders in privately held corporations. If you’re a major owner of a private corporation, filing for bankruptcy could affect the corporation’s legal and tax status. This book doesn’t cover your situation.

Business reorganization. This book doesn’t cover Chapter 11 of the bankruptcy laws, which allows a business to continue operating while paying off all or a portion of its debts under court supervision.

Farm reorganization. A special set of bankruptcy statutes, called Chapter 12, lets family farmers continue farming while paying off their debts over time. Chapter 12 isn’t addressed in this book.

Here is a brief overview of the Chapter 7 bankruptcy process, from start to finish.

What Bankruptcy Costs

The whole Chapter 7 bankruptcy process takes about three to six months, costs $335 in filing fees (unless you get a waiver), and usually requires only one brief meeting, out of court, with the bankruptcy trustee—the official appointed by the bankruptcy judge to process your bankruptcy. If you use a lawyer, you can expect to pay an additional $1,500 or more in legal fees. Of course, you can save most of this money by representing yourself with the help of this book. See Ch. 10 for information on finding lawyers.

Mandatory Credit Counseling

Before you can file for bankruptcy, you must consult a nonprofit credit counseling agency. The purpose of this consultation is to see whether there is a feasible way to handle your debt load outside of bankruptcy, without adding to what you owe. You can complete this mandatory credit counseling course online or over the phone.

To qualify for bankruptcy relief, you must show that you received credit counseling from an agency approved by the U.S. Trustee’s office within the 180-day period before you file.

Once you complete the counseling, the agency will give you a certificate showing that you participated. It will also give you a copy of any repayment plan you worked out with the agency.

There are a few exceptions to this counseling requirement. You don’t have to participate if you are in the military on active duty, you are incapacitated, or you have a disability that prevents you from participating. You also don’t have to get counseling if there is no agency available to you. For example, one court excused a debtor’s failure to get counseling because no agency could provide counseling in the debtor’s Creole language, and the debtor could not afford to hire an interpreter. (In re Petit-Louis, 344 B.R. 696 (Bankr. S.D. Fla. 2006).)

The purpose of credit counseling is to give you an idea of whether you really need to file for bankruptcy or whether an informal repayment plan would get you back on your economic feet. Counseling is required even if it’s perfectly clear that a repayment plan isn’t feasible (that is, your debts are too high and your income is too low) or you have debts that you find unfair and don’t want to pay. (Credit card balances inflated by high interest rates and penalties are particularly unpopular with many filers, as are emergency room bills and deficiency judgments based on auctions of repossessed cars.)

Rules Counseling Agencies Must Follow

In addition to providing services without regard to your ability to pay, counseling agencies have to meet a number of other requirements. They must:

disclose to you their funding sources, their counselor qualifications, the possible impact of their proposed plan on your credit report, the cost of the program, if any, and how much of the costs you will have to pay

provide counseling that includes an analysis of your current financial condition, factors that caused the condition, and how you can develop a plan to respond to the problems without adding to your debt

use trained counselors who don’t receive any commissions or bonuses based on the outcome of the counseling services (that is, the counselors may not receive kickbacks, although kickbacks to the agency may be legal), and

maintain adequate financial resources to provide continuing support services over the life of any repayment plan. For example, if they propose a three-year payment plan, they must have adequate reserves to service your case for three years.

The law requires only that you participate—not that you go along with whatever the agency proposes. Even if a repayment plan is feasible, you aren’t required to agree to it. However, if the agency does come up with a plan, you must file it along with the other required bankruptcy paperwork. See Ch. 6 for more information on the credit counseling requirement, including how to get the certificate of completion that you’ll have to file with your other bankruptcy papers.

Filing Your Papers

To begin a Chapter 7 bankruptcy case, you must complete a packet of forms and file them with the bankruptcy court in your area. Many filers are shocked to see the long list of documents required in a Chapter 7 case. But don’t be alarmed: Many of these forms require very little time and effort to fill in, and most filers won’t have to complete them all. Just take things one step at a time, following the detailed instructions in Ch. 6, and you’ll do just fine.

Once you file the papers described below, the court will send a notice of your bankruptcy filing to all of the creditors listed in your bankruptcy documents. You will get a copy as well. This notice (called a “341 notice” because it is required by Section 341 of the bankruptcy code) sets a date for the meeting of creditors (see “The Meeting of Creditors (341 Hearing),” below), provides the trustee’s name, address, and telephone number, and gives creditors the deadlines for filing objections to your bankruptcy or to the discharge of particular debts.

The Voluntary Petition

You begin a Chapter 7 case by filing a Voluntary Petition, the official court form that requests a bankruptcy discharge of your debts. This form asks for some basic information, including your name, address, and the last four digits of your Social Security number; information about your creditors, debts, and property; and whether you have lived, maintained a residence or business, or had assets in the district where you are filing for most of the 180-day period before you file (this gives you the right to file in that district). You’ll find line-by-line instructions for completing the Voluntary Petition in Ch. 6.

Additional Documents

You will have to submit quite a few more documents, either when you file the petition or (with a few exceptions) within 14 days after you file. These additional documents include lists of your creditors, assets, debts, income, and financial transactions prior to filing; copies of your most recent federal tax return, bank statements, and wage stubs; a list of property you are claiming as exempt (that is, property that you are entitled to keep even though you are filing for bankruptcy); information on what you plan to do with property that serves as collateral for a loan (such as a car or home); proof that you have completed your prefiling credit counseling; and, later in your bankruptcy case, proof that you have completed budget counseling.

Emergency Filing

If you need to stop creditors quickly, you can do so without filing all of the bankruptcy forms we describe in Ch. 6 (although you’ll eventually have to complete the full set). In some situations, speed is essential. For example, if you face foreclosure and your house is going to be sold in a few days, or your car is about to be repossessed, filing an emergency petition will stop the repossession or foreclosure cold.

To put an end to collection efforts, you can simply file the three-page Voluntary Petition form, a form providing your Social Security number, and a document known as the Creditors’ Matrix, which lists the name, address, and zip code of each of your creditors. On the petition, you’ll have to either swear that you’ve completed credit counseling or explain why emergency circumstances prevented you from doing so. The automatic stay, which stops collection efforts and lawsuits against you, will then go into effect. (Ch. 2 covers the automatic stay in detail.) You’ll have 14 days to file the rest of the forms. (Bankruptcy Rule 1007(c).)

You should file on an emergency basis only if you absolutely must. Many emergency filers fail to meet the 14-day deadline and have their petitions dismissed as a result. Because you are rushing, you are more likely to make mistakes that have to be corrected later, which just adds work and potential errors to the process. But if filing an emergency petition is the only way to stop a potentially disastrous creditor action, go for it. Just remember the deadline for filing the rest of the forms.

Perhaps the most important form requires you to compute your average gross income during the six months prior to your bankruptcy filing date and compare that to the median income for your state. If your income is more than the median, another form takes you through a series of questions (called the “means test”) designed to determine whether you could file a Chapter 13 bankruptcy and pay some of your unsecured debts over time. The outcome of this test will largely determine whether you qualify for Chapter 7 bankruptcy. (See “Who Cannot File for Chapter 7,” below, and Ch. 6 for detailed information about these calculations.)

After you file, you may want to amend some or all of your forms to correct mistakes you discover or to reflect agreements you reach with the trustee. Amending these forms is fairly simple; we explain how to do it in Ch. 7.

The Automatic Stay

Often, people filing for bankruptcy have faced weeks, months, or even years of harassment by creditors demanding payment and threatening lawsuits and collection actions. Bankruptcy puts a stop to all this. Filing your bankruptcy petition instantly creates a federal court order (called an “Order for Relief” and colloquially known as the “automatic stay”) that requires your creditors to stop all collection efforts. So, at least temporarily, most creditors cannot call you, write dunning letters, legally grab (garnish) your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service or welfare benefits. As explained in Ch. 2, the automatic stay is not absolute. Some creditors are not affected by the automatic stay, and others can get the stay lifted to collect their debts, as long as they get the judge’s permission first.

CAUTION

Renters beware. The automatic stay’s magic does not extend to certain eviction actions. Even if the automatic stay does kick in to temporarily halt your eviction when you file for bankruptcy, the bankruptcy court will almost always lift the stay and let the eviction proceed, upon the landlord’s request. See Ch. 2 for more information on the automatic stay and eviction proceedings.

Court Control Over Your Financial Affairs

By filing for bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the bankruptcy trustee (see “The Trustee,” below). While your case is open, you can’t sell or give away any of the property that you own when you file without the trustee’s consent. However, with a few exceptions, you can do what you wish with property you acquire and income you earn after you file for bankruptcy. You are also allowed to borrow money after you file.

The U.S. Trustee

The U.S. Trustee Program is a division of the U.S. Department of Justice. Each U.S. Trustee oversees several bankruptcy courts. Individual cases within those courts are assigned to assistant U.S. Trustees, who also employ attorneys, auditors, and investigators. U.S. Trustees work closely with their Department of Justice colleagues from the FBI and other federal agencies to ferret out fraud and abuse in the bankruptcy system. The U.S. Trustees (and the assistant U.S. Trustees) also supervise the work of the panel or standing trustees, who are appointed by the courts.

You will most likely encounter the U.S. Trustee in one of the following cases:

Your bankruptcy papers suggest that you may be engaging in fraudulent behavior.

Your case is selected for a random audit. (Closer scrutiny of bankruptcy petitions seems to be on the rise as the total number of bankruptcy filings decreases.)

Your bankruptcy schedules show that you don’t pass the means test (explained later in this chapter).

You use a bankruptcy petition preparer (BPP) to help you with your paperwork (see Ch. 10 for more on BPPs), and the trustee believes that the BPP has done something illegal—typically, that the BPP has not just helped you complete your papers, but has given you legal advice as well, something that only lawyers are allowed to do. In this situation, your bankruptcy won’t be affected, but the U.S. Trustee may want you to act as a witness against the BPP.

The Trustee

The bankruptcy court exercises control over your property and debts by appointing an official called a “trustee” to manage your case. Your trustee’s name and contact information will be in the official notice of filing you receive in the mail several days after you file your petition. The trustee (or the trustee’s staff) will examine your papers to make sure they are complete and to look for property to sell for the benefit of your creditors. The trustee’s primary duty is to see that your creditors are paid as much as possible. The trustee is mostly interested in what you own and what property you claim as exempt, but will also look at your financial transactions during the previous years (in some cases these can be undone to free up assets that can be distributed to your creditors). While it is tempting to believe the trustee is there to help you, that is not the case. The more assets the trustee recovers for creditors, the more the trustee is paid.

Some courts appoint full-time trustees (called “standing” trustees) to handle all cases filed in that courthouse. Other courts appoint trustees on a rotating basis from a panel of bankruptcy lawyers (called “panel” trustees). Either way, the trustees have the same responsibilities.

How Trustees Get Paid

Trustees receive a flat fee of $60 per Chapter 7 case. In addition, trustees are entitled to a percentage of the funds they disburse to the debtors’ creditors: 25% of the first $5,000 disbursed, 10% of the next $45,000, and so on. Most Chapter 7 cases involve no disbursements (because typically there are no nonexempt assets), so trustees usually have to settle for the $60 fee. But these fee rules give trustees a financial incentive to look closely at bankruptcy filings, especially if debtors appear to have some valuable property. Trustees can earn a “commission” if they can actually grab some property, sell it, and distribute the proceeds to creditors.

The Meeting of Creditors (341 Hearing)

As explained above, you will receive notice of the date of your meeting of creditors (also called the 341 hearing) shortly after you file your bankruptcy papers. This meeting is typically held somewhere in the courthouse or federal building (but almost never in a courtroom). The trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the documents you filed. For instance, the trustee might ask how you arrived at the value you assigned to an item of property listed in your papers, whether you have given anything away in the last year, and whether the information you put in your papers is 100% accurate. All together, this questioning usually takes about five minutes. Creditors rarely attend this meeting—but if they do, they will also have a chance to question you under oath, usually about where property that serves as collateral to a loan is located, information you gave them to obtain a loan, or the nature and location of your assets in general. In most bankruptcy cases, this will be the only personal appearance you have to make. We discuss the creditors’ meeting in more detail, and explain other situations when you might have to appear in court, in Ch. 7.

When a Disgruntled Ex-Spouse Casts Suspicion on Your Petition

Most of the time, a trustee won’t question the accuracy of your personal property schedules unless there is a reason to do so. So what causes a trustee to become suspicious? One source of suspicion that’s hard to ignore is a disgruntled ex-spouse who shows up at the meeting of creditors claiming that you didn’t list the Rolex watch she gave you for your fifth wedding anniversary or the artwork you bought on a cruise to Mexico. These types of allegations, if credible, might prompt the trustee to take a closer look at your petition and, if warranted, request an inventory of your home or storage facility. Of course, the easiest way to prevent this is to be as transparent as possible and to keep in mind that sometimes your past does indeed come back to haunt you.

What Happens to Your Property

In your bankruptcy papers, you’ll be asked which items of your property you claim as exempt. Each state allows debtors to keep certain types of property or a certain amount of equity in that property. The exemptions available to you depend on where you lived prior to filing for bankruptcy. (For more information, see Ch. 3.)

If, after the creditors’ meeting, the trustee determines that you have some nonexempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. The trustee is highly unlikely to inventory your home (though it can happen) or seize your property, but will order you to turn over property listed in your schedules or identified during your creditors’ meeting or in other proceedings. If you don’t turn over the property, the bankruptcy judge can order you to do it (and hold you in contempt if you don’t). Plus, the court can dismiss your bankruptcy petition if you fail to cooperate with the trustee.

If your nonexempt property isn’t worth very much or would be hard to sell, the trustee may “abandon” it—which means that you get to keep it, even though it’s nonexempt. As it turns out, most of the property that Chapter 7 debtors own is either exempt or essentially worthless for purposes of raising money for creditors. As a result, few debtors end up losing any of their property, unless the property is collateral for a secured debt. (See “Secured Debts,” below, and Ch. 5 for a detailed discussion of secured debts.)

Secured Debts

If you’ve pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and motor vehicles. If you are behind on your payments, a creditor can ask to have the automatic stay lifted so it can repossess the property or foreclose on the mortgage. However, if you are current on your payments, you can keep the property and continue making payments as before—unless you have built up enough nonexempt equity in the property to make it worthwhile for the trustee to sell it for the benefit of your unsecured creditors. (See Ch. 5 for more information on secured debts.)

If a creditor has recorded a lien against your property without your consent (for example, because the creditor obtained a money judgment against you in court), that debt is also secured. However, in some cases and with certain types of property, you may be able to wipe out the debt and keep the property free of the lien. This is called “lien avoidance,” and it is also covered in Ch. 5.

Contracts and Leases

If you’re a party to a contract or lease that’s still in effect, the trustee may take your place as a party to the contract—known as “assuming” the contract—and enforce it for the benefit of your unsecured creditors. Alternatively, the trustee can decide not to step in as a party to the contract—called “rejecting” the contract—in which case you get to decide whether you want the contract to continue in force or not.

For example, suppose you have a five-year lease on some commercial property when you file for bankruptcy. If you’ve got a good lease (perhaps at a below-market rate, with a few years left on it, for property in an up-and-coming part of town), the trustee may decide to assign the lease to a third party in exchange for money to pay your unsecured creditors. In this situation, the trustee will assume the lease and assign it to the highest bidder. The trustee can do this even if the lease forbids assignments because the trustee’s rights trump any transfer restrictions in the lease. However, if the trustee doesn’t think selling the lease is worth the trouble (as is almost always the case), the trustee will take no action, which is the same thing as rejecting the lease. Of course, you and the landlord can renew the lease at any time.

You can assume leases on personal property (such as a car or business equipment) rather than having the trustee assume them. However, you will be allowed to do this only if you are able to cure any defaults on the lease, as required by the creditor. (Ch. 6 provides instructions for completing Schedule G, a required bankruptcy form in which you list all current contracts and leases, and the Statement of Intention, another required form in which you tell your creditors and the trustee whether you would like to assume any leases.)

Personal Financial Management Counseling

All debtors must attend a two-hour course on managing finances in order to receive a bankruptcy discharge. This is sometimes referred to as budget counseling, debtor education, or predischarge counseling. You must take this course from an agency approved by the U.S. Trustee Program. (For a list of approved agencies, go to the U.S. Trustee’s website, www.usdoj.gov/ust, and click “Credit Counseling & Debtor Education.”) You will be charged fees on a sliding scale, but you can’t be denied services because of your inability to pay. Once you complete your counseling, you must file a certification form with the court.

The Bankruptcy Discharge

About 60 days after the 341 hearing, you will receive a Notice of Discharge from the court. This notice doesn’t list which of your particular debts are discharged, but it provides some general information on the back of the form about what kinds of debts are and are not affected by the discharge order. In most cases, all debts are discharged except:

debts that automatically survive bankruptcy (child support, most tax debts, and student loans are examples), and

debts that the court has declared nondischargeable as a result of an action brought by a creditor, as might be the case for debts you incurred through fraudulent or willful and malicious acts.

Ch. 9 explains which debts are—and are not—discharged at the end of your bankruptcy case. See also “Who Cannot File for Chapter 7,” below, which explains the circumstances in which your entire discharge—not just the discharge of a specific debt—may be denied.

What If You Change Your Mind About Chapter 7 Bankruptcy After Filing?

If you don’t want to go through with your Chapter 7 bankruptcy after you file, you can ask the court to dismiss your case. A court will generally agree, as long as the dismissal won’t harm your creditors’ interests. For example, if you have substantial nonexempt equity in your house, the court will probably deny your dismissal request so the trustee can sell the house to make some money for your unsecured creditors. (See Ch. 4 for more on what happens to your home in bankruptcy.)

As an alternative to having your case dismissed, you may exercise your one-time “right to convert” the case to a Chapter 13 bankruptcy, as long as you really intend to propose and follow a repayment plan. This will keep your property out of the trustee’s hands, because in Chapter 13 you don’t have to surrender property if you complete your repayment plan. (You do, however, have to pay your unsecured creditors at least the value of your nonexempt property, as explained in “Pay Over Time With Chapter 13 Bankruptcy,” below.)

After Bankruptcy

Once you receive your bankruptcy discharge, you are free to resume your economic life without reporting your activities to the bankruptcy court unless you receive (or become eligible to receive) an inheritance, insurance proceeds, or proceeds from a divorce settlement within 180 days after your filing date. In that case, you have a duty to report those assets to the trustee. If you don’t, and they are discovered, the trustee (and the court, if necessary) can order you to turn over the assets and your discharge may be revoked.

After bankruptcy, you cannot be discriminated against by public or private employers solely because of the bankruptcy, although this ban on discrimination has exceptions (discussed in Ch. 8). You can start rebuilding your credit almost immediately, but it may take several years (or more) to get decent interest rates on a credit card, mortgage, or car note. You can’t file a subsequent Chapter 7 bankruptcy case until eight years have passed since your last filing date. You can file for Chapter 13 bankruptcy any time, but you can’t get a Chapter 13 discharge unless you file at least four years after you filed the earlier Chapter 7 case.

Who Cannot File for Chapter 7

Filing for Chapter 7 bankruptcy is one way to solve debt problems, but it isn’t available to everyone. Here are some situations in which you may not be able to use Chapter 7.

You Can Afford a Chapter 13 Repayment Plan

Under the bankruptcy rules, filers with higher incomes must pay back some of their debts over time to file under Chapter 13 rather than liquidating their debts outright in Chapter 7. If the U.S. Trustee decides, based on the information about your income, debts, and expenses you provide in your required paperwork, that you can afford a Chapter 13 plan under the rules, it will file a motion to have your case dismissed. The court is likely to grant that motion and throw out your case unless you convert to a Chapter 13 bankruptcy.

To figure out whether you will be allowed to use Chapter 7, you must first:

determine your “current monthly income” (actually, your average income in the six months before you file for bankruptcy), and

compare that figure to the median family income in your state for the same size household.

If your current monthly income is no more than the state’s median income, your Chapter 7 bankruptcy won’t be presumed to be “an abuse” of the bankruptcy process. However, if your actual income (as shown in Schedule I of your bankruptcy papers, explained in Ch. 6) is significantly higher than your expenses (as listed in Schedule J, also explained in Ch. 6), you might still be forced into Chapter 13. (In re Boule, 415 B.R. 1 (Bankr. D.Mass. 2009), In re Lanza, 450 B.R. 81 (Bankr. M.D. Pa. 2011).)

If your current monthly income exceeds the state median income, you will have to do some calculations (called the means test) to determine whether you can afford to pay off at least some of your unsecured debts in a Chapter 13 plan. (If you have to take the means test, you can find step-by-step instructions in Ch. 6.)

Certain Disabled Veterans Can Skip the Math

If you are a disabled veteran, and the debts you wish to discharge were incurred primarily while you were on active duty or engaged in homeland defense activities, the court is legally required to treat you as if your income is less than the state median. This means that you’ll be able to file for Chapter 7 regardless of your income or expenses.

The law doesn’t clearly indicate what will happen if only some of your debts were incurred while you were on active duty. Some courts require that more than 50% of your debts be incurred while on active duty to qualify for this exception. However, other courts may have stricter requirements. If you are unsure about whether you qualify, talk to a bankruptcy attorney in your area to learn the requirements in your jurisdiction.

Determine Your Current Monthly Income

Legally, your current monthly income is your average monthly income over the six months preceding the month in which you filed for bankruptcy. You must include almost all types of income (with a few exceptions such as benefits received under the Social Security Act), taxable or not—this means, for example, that if you are including wages in your income, you must use your gross earnings, not the net income you actually take home after taxes are withheld and other deductions are made. For filers who lost jobs or other income during the six-month period before filing for bankruptcy, this current income figure may be significantly more than what they are actually earning each month by the time they file for bankruptcy.

Example: John and Marcia are married and have two young children. They fell quickly into debt after John was forced out of his job because of a work-related injury on April 1, 2014. Three months later, on July 1, 2014, John and Marcia decide to file for bankruptcy.

To compute their current monthly income, Marcia adds up the family’s income for the period from January 1, 2014 through June 30, 2014 (the six-month period before their filing date). This includes John’s gross salary for the first three months (he made $8,000 a month as a software engineer), plus $1,800 in workers’ compensation benefits for each of the last three months. Marcia made $1,000 during each of the first three months and had no income for the last three months. The total family income for the six-month period is $32,400. The family’s current monthly income is $32,400 divided by six, or $5,400, even though the amount they actually took in during each of the three months before filing was only $1,800.

Use the Current Monthly Income Worksheet, below (and in Appendix B), to calculate your current monthly income by:

adding up all of the income you received during the six-month period before the month in which you filed for bankruptcy, and

regular contributions of your spouse, if he or she isn’t filing for bankruptcy with you

unemployment compensation (in some states; in others you may not have to include state unemployment insurance benefits)

workers’ compensation insurance

state disability insurance

annuity payments, and

lump-sum, windfall payments (such as lottery winnings).

Income You Don’t Have to Include

Your current monthly income includes income from all sources, except:

income tax refunds

payments you receive under the Social Security Act (including Social Security retirement benefits, Social Security Disability Insurance, Supplemental Security Income, Temporary Assistance for Needy Families, and possibly state unemployment insurance)

payments to you as a victim of war crimes or crimes against humanity, and

payments to you as a victim of international or domestic terrorism.

Determine Your Household Size

The size of your household is also very important. The more members you have, the less likely it is that your income will exceed the state median for households of the same size, and the less likely you are to have to take the means test. For example, assume that your current monthly income is $6,000, the median income for a household of three in your state is $5,800, and the median income for a household of four is $6,500. Being able to count that additional person means you won’t have to take the means test.

Unfortunately, neither Congress nor the courts have given clear guidance on how to calculate household size. Many courts adopt the census test for a household, which includes all of the people, related and unrelated, who occupy a house, apartment, group of rooms, or single room that is intended for occupancy as separate living quarters. Under this test, you can count your children or stepchildren even if they are not your dependents for tax purposes.

However, some courts allow debtors to count only the people they can claim as dependents on their tax return. Other courts use the economic unit approach to household size, which includes individuals who financially depend on or support the debtor or whose income and expenses are closely intermingled with and connected to the debtor’s.

Domestic partners count as a single household. But mere roommates are not part of the same household if they have separate rooms within a house and don’t act as a single economic unit by mingling their incomes and jointly paying expenses.

One vexing issue is whether children can be counted as part of a household if they are only living with the parent part time under a custody and visitation agreement. In general, the answer depends on the rules in your jurisdiction. While there is no uniform rule, the 4th Circuit Court of Appeals recently approved a fractional approach, based on how many days out of the year each child lives with the debtor, to calculate household size. (Johnson v. Zimmer, 686 F.3d 224 (4th Cir. 2012).) If this describes your situation, and being able to count your children as part of your household would mean you don’t have to take the means test, it might make sense to talk to a local bankruptcy attorney and find out how your local court handles this issue. (See Ch. 10 for information on finding a bankruptcy lawyer.)

Compare Your Income to Your State’s Family Median Income

The census bureau publishes annual family median income figures for all 50 states. To compare your current monthly income to the family median income for your state, you’ll need to multiply your current monthly income by 12 (or divide the annual family median income figure by 12). Let’s do it the first way. In John and Marcia’s case, the family’s current monthly income ($5,400) multiplied by 12 would be $64,800.

Once you’ve got your current monthly income and your family median income for the same time period (one month or one year), compare them to see whether your current monthly income is more or less than the median. You can find the family median income figures as of the writing of this edition in the Median Family Income Chart in Appendix B. You can also find up-to-date figures at the website of the U.S. Trustee at www.usdoj.gov/ust (select “Means Testing Information”) or the United States Census Bureau, www.census.gov (search for “State Median Income” from the home page).

You can see from the chart in Appendix B that John and Marcia’s current monthly income would be more than the family median income in most states.

State Median Income Figures Change Frequently

The figures in the Median Family Income Chart change about twice a year, so be sure you are using the most recent chart. Until 2010, you could pretty much rely on the figures going up slightly; however, the last several times the figures were updated, the median income decreased in many states.

For Larger Families

Although the U.S. Census Bureau generates median figures for families that have up to seven members, Congress does not want you to use these figures if you have a larger family. The Census figures are to be used for families that have up to four members (these are the numbers you will find in Appendix B). If there are more than four members of your family, you must add a set amount per additional person to the four-member family median income figure for your state (currently, this amount is $8,100).

What to Do Next

If, like most bankruptcy filers, your current monthly income is equal to or less than your state’s median, then you will likely be allowed to file for Chapter 7 bankruptcy. As you will discover, however, your actual monthly income and actual expenses, as calculated on Schedules I and J (see Ch. 6) may also affect your eligibility to use Chapter 7. And, because of how the means test works, your actual income and expenses may be quite different than what the means test shows, primarily because the means test uses your average income over the six months before you file, which might not be the same as what you actually earn each month.

If your income exceeds the state median income, you’ll need to take the full means test to figure out whether a court would presume your Chapter 7 bankruptcy case to be abusive. (If this happens, you would have to persuade the court that it’s appropriate for you to file for Chapter 7, under the circumstances—see “Special Problems” in Ch. 7.) You can find the means test forms and step-by-step instructions for completing them in Ch. 6.

If you are required to take the means test and you pass it—which means you don’t have enough disposable income to fund a Chapter 13 repayment plan—you’ve passed the first Chapter 7 eligibility hurdle. Remember, you’ll also have to show that your actual income and expenses don’t allow you to afford a Chapter 13 plan. So, even if you qualify for Chapter 7 based on the means test, you may face another hurdle down the road.

If you can’t pass the means test, you might consider filing for Chapter 13 bankruptcy, with the help of Nolo’s Chapter 13 Bankruptcy, by Stephen Elias and Kathleen Michon. You should also look at options outside of the bankruptcy system, in “Alternatives to Chapter 7 Bankruptcy,” below.

You Previously Received a Bankruptcy Discharge

You cannot file for Chapter 7 bankruptcy if you obtained a discharge of your debts under Chapter 7 in a case filed within the past eight years, or under Chapter 13 in a case filed within the previous six years. (11 U.S.C. § 727.) However, if you obtained a Chapter 13 discharge in good faith after paying at least 70% of your unsecured debts, the six-year bar does not apply.

Note that these eight- and six-year periods run from the date you filed for the earlier bankruptcy, not the date you received your discharge.

Example: Brenda files a Chapter 7 bankruptcy case on January 31, 2012. She receives a discharge on April 20, 2012. Brenda files another Chapter 7 bankruptcy on February 1, 2020. The second bankruptcy is allowed because eight years have passed since the date the earlier bankruptcy was filed (even though fewer than eight years have passed since Brenda received a discharge in the earlier case).

Converting to Chapter 7 After Filing for Chapter 13

Can you file under Chapter 13 and then convert to Chapter 7 later, even though you would have flunked the means test had you initially filed for Chapter 7? Probably not. More and more bankruptcy courts are ruling that you must take the means test in this situation.

In re Fox, 370 B.R. 639 (Bankr. D. N.J. 2007) serves as an example of the minority view. In that case, the court found that the debtor did not have to file the means test form when converting from a Chapter 13 to a Chapter 7. However, the court emphasized that the debtor must have filed the Chapter 13 in good faith and not just to avoid taking the means test. This means the debtor must have proposed a feasible (or close to feasible) Chapter 13 plan. (See “Pay Over Time With Chapter 13 Bankruptcy,” below.)

But many other courts have taken the opposite stance. For example, a Rhode Island bankruptcy court held that a debtor who converted to Chapter 7 only two weeks after filing a Chapter 13 case would have to take the means test. (In re Perfetto, 361 B.R. 27 (D. R.I. 2007).) The 8th Circuit Bankruptcy Appellate Panel decided that the means test does apply to converted cases. (In re Chapman, 447 B.R. 250 (B.A.P. 8th Cir. 2011).) The 10th Circuit Court of Appeals went even further and denied the debtors’ discharge altogether when they willfully disobeyed their Chapter 13 confirmation order and subsequently converted their case to a Chapter 7. (Standiferd v. U.S. Trustee, 641 F.3d 1209 (10th Cir. 2011).) In fact, one court recently noted that the majority of judges looking at this issue have held that you must take the means test when converting from Chapter 7 to Chapter 13. (In re Hayes, 2015 LEXIS 161 (Bankr. S.D. Tex. 2015.)

A Previous Bankruptcy Was Dismissed Within the Previous 180 Days

You cannot file for Chapter 7 bankruptcy if your previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because you:

violated a court order, or

requested the dismissal after a creditor asked for relief from the automatic stay. (11 U.S.C. § 109(g).)

You Haven’t Met the Credit Counseling Requirements

To file for Chapter 7 bankruptcy, you have to satisfy all the requirements for credit counseling. This means that you must obtain the counseling within 180 days before you file, and file a certificate of completion no later than 14 days after you file, unless you fit within one of the exceptions to the counseling requirement (discussed in “Mandatory Credit Counseling,” above) or you didn’t obtain counseling for some other reason that is acceptable to the bankruptcy court. (See Ch. 6 for more on these requirements.)

You Defrauded Your Creditors

Bankruptcy is geared toward the honest debtor who got in too deep and needs a fresh start. A bankruptcy court will not help someone who has played fast and loose with creditors or the court. This type of behavior can lead to a denial of your bankruptcy discharge and even to criminal charges if you lie under oath.

Certain activities are red flags to the courts and trustees. If you have engaged in any of them within the past several years, do not file for bankruptcy until you consult with a bankruptcy lawyer. These no-nos are:

unloading assets to your friends or relatives

incurring debts for luxury items when you were clearly broke, and

concealing property or money from your spouse during a divorce proceeding.

Example: Joan wants to file for bankruptcy but is worried that she’ll lose her house. Before filing, Joan puts the house in her mother’s name on the understanding that her mother will deed it back to her after the bankruptcy is completed. Before filing, Joan learns that this is a definite no-no and can land her in serious trouble. She retransfers the house back into her own name and files a Chapter 7 bankruptcy. The trustee learns of the transactions and successfully opposes Joan’s discharge on the ground that she acted fraudulently. The fact that she undid the fraud before filing doesn’t help her.

Your Filing Constitutes “Abuse”

The court can dismiss your case if it finds that your filing is abusive—that is, that your actions demonstrate that you aren’t entitled to the remedy offered by Chapter 7. As explained above, if you fail the means test, the court can presume that your bankruptcy filing is abusive and prevent you from using Chapter 7. However, even if you pass the means test, the court might find abuse. For example, if your actual income (as calculated in Schedule I of your bankruptcy paperwork) significantly exceeds your actual expenses (as calculated in Schedule J of your papers), the court might find that you should not be allowed to use Chapter 7, even if you pass the means test.

Even if you clearly can’t afford a Chapter 13 repayment plan, the court can still deny you the benefit of Chapter 7 by refusing to discharge your debts. Here are some examples:

The court can refuse to grant a Chapter 7 discharge if the debtor fails to explain how he or she got so deeply in debt. (In re Tanglis, 344 B.R. 563 (Bankr. N.D. Ill. 2006).)

If the debtor fails to explain what happened to money received from a personal injury settlement or tax refund, the court can refuse to grant a Chapter 7 discharge. (In re O’Donnell, 528 B.R. 308 (Bankr. D.Mass. 2014).)

Voluntary unemployment can be considered abusive, because the debtor could pay back some or all of the debts if employed. (In re Richie, 353 B.R. 569 (Bankr. E.D. Wash. 2006).)

A debtor who couldn’t account for how cash advances were spent during the previous year may be denied a Chapter 7 discharge on grounds of abuse. (In re Yanni, 354 B.R. 708 (Bankr. E.D. Penn. 2006).)

These types of cases are pretty rare. You can pretty much count on receiving a discharge without having to prove your virtue—even if you lack it in large degree.

The U.S. Trustee Program Actively Roots Out Fraud

The U.S. Trustee Program, a branch of the U.S. Department of Justice, is charged with rooting out bankruptcy-related fraud. Copies of all bankruptcy petitions filed in your district are passed on to the U.S. Trustee for that district. The U.S. Trustee randomly selects some cases for audit, and audits others that have red flags indicating possible fraud. In early 2013, the U.S. Trustee Program suspended its random bankruptcy audits, citing budget constraints but resumed auditing in 2014 at a reduced level. It’s unknown if, and when, the audits will start again. However, your case trustee will continue to look for signs of fraud. You don’t need to worry long as you are scrupulously honest in your paperwork and disclosures.

You Are Attempting to Defraud the Bankruptcy Court

Misleading the court is a terrible idea. If you lie, cheat, or attempt to hide assets, your current debt crisis may no longer be your biggest legal problem. You must sign your bankruptcy papers under “penalty of perjury,” swearing that everything in them is true. You also have to verify your papers, under oath, at your creditors’ meeting. If you get caught deliberately failing to disclose property, omitting material information you are asked to provide about your financial affairs during previous years, or using a false Social Security number (to hide your identity as a prior filer), you will not get any bankruptcy relief. You may even be prosecuted for perjury or fraud on the court.

Does Chapter 7 Bankruptcy Make Economic Sense?

If you are inclined to file for Chapter 7 bankruptcy, take a moment to consider whether it makes economic sense. If filing for Chapter 7 won’t help you out of your current debt problems, will force you to give up property you want to keep, or is unnecessary because of your financial situation, then Chapter 7 might not be the best option.

For Married Couples

If you are married, consider the debts and property of both spouses as you read this section. Married couples usually benefit from filing jointly, but not always. For example, if one spouse brings a lot of debt to the marriage, while the other spouse has clean credit, it might make more sense for the debt-ridden spouse to file alone. Filing alone might also be a good idea if the couple is separated or divorcing, one spouse is barred from filing due to a previous bankruptcy, or filing together would put valuable property at risk (for example, property owned only by the nonfiling spouse or property the couple owns as tenants by the entirety). You’ll find more information on the benefits of filing jointly versus filing alone in Ch. 6.

Are You Judgment Proof?

Most unsecured creditors are required to obtain a court judgment before they can start collection procedures, such as a wage garnishment or seizure and sale of personal property. Holders of tax, child support, and student loan debts are exceptions to this general rule. If your debts are mainly of the type that requires a judgment, the next question is whether you have any income or property that is subject to seizure by your creditors if they obtain a judgment. For instance, if all of your income comes from Social Security (which can’t be taken by creditors), and all of your property is exempt (see Ch. 3), there is nothing your creditors can do with their judgment. That makes you judgment proof. While you may still wish to file for bankruptcy to get a fresh start, nothing bad will happen to you if you don’t file, no matter how much you owe. For more on what it means to be judgment proof, see “Alternatives to Chapter 7 Bankruptcy,” below.

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